NECESSITY, FUNCTION, AND CONFORMITY: KRS
131.130(1) authorizes the Department of Revenue to promulgate administrative
regulations to administer and enforce Kentucky's tax laws. KRS 141.010(10)(a)
and (12)(a) provides an exclusion from gross income when calculating Kentucky income
tax for income that is exempt from state taxation by the Kentucky Constitution
and the Constitution and statutory laws of the United States and Kentucky. KRS
136.290, 136.300, 136.310, and 136.320 impose an ad valorem tax on the total
value of the capital of federally or state chartered savings and loan
associations, savings banks, and other similar institutions and domestic life
insurance companies authorized to transact business in Kentucky, with property
and payroll both within and without this state. This administrative regulation
establishes the requirements relating to taxation of federal and certain
nonfederal obligations in accordance with those statutes.

Section 1. Income Taxation. Interest
income from United States government obligations upon which states are prohibited
by federal law from imposing a tax shall be excluded from gross income when
calculating Kentucky income tax liability. Only the interest income from exempt
United States government obligations included in the taxpayer’s federal
taxable income may be deducted from the taxpayer’s gross income for Kentucky income tax purposes.

Section 2. This section contains two
(2) lists of certain agencies, authorized corporations, and banks of the United States government from which Kentucky taxpayers may receive interest income. These lists are
not all-inclusive, nor are they intended to be conclusive of the taxable or
exempt status of a particular obligation issued by or in conjunction with a
listed department, agency, instrumentality, or other entity.

(1) The list in this subsection shall
serve as examples of departments, agencies, and instrumentalities that issue United States government obligations from which interest income shall be exempt from state
taxation.

(2) The list in this subsection shall
serve as examples of organizations which issue obligations from which interest
income shall be taxable for Kentucky income tax purposes.

(a) Bank Certificates of Deposit;

(b) Farmers Home Administration;

(c) Federal Home Loan Mortgage Corp.
(FHLMC or "Freddie Mac");

(d) Federal National Mortgage
Association (FNMA or "Fannie Mae");

(e) Government National Mortgage
Association (GNMA or "Ginnie Mae");

(f) Inter-American Development Bank;

(g) International Bank for Reconstruction
and Development (World Bank); or

(h) International Monetary Fund.

Section 3. Property Taxation. A claim
by a taxpayer that property or capital subject to the ad valorem taxes imposed
by KRS 136.290, 136.300, 136.310 or 136.320 is exempt under federal law shall
be supported by specific statutory or binding case authority. In the absence of
statutory or binding case authority, all intangible property shall be taxable.
Securities merely guaranteed by the U.S. government shall be taxable as
intangible property.

Section 4. Exempt federal obligations shall
be classified as:

(1) Direct obligations of the United States
such as U.S. Treasury bonds, U.S. Treasury notes or U.S. Treasury bills; or

(2) Direct obligations of U.S. government agencies.

Section 5. (1) The following list is
provided as a general reference of obligations exempt from state ad valorem
taxation imposed by KRS 136.290, 136.300, 136.310, or 136.320:

(a) Banks for Cooperatives;

(b) Central Banks for Cooperatives;

(c) Commodity Credit Corporation;

(d) Farmers Home Administration;

(e) Farmers Home Corporation;

(f) Federal Credit Union;

(g) Federal Savings and Loan
Associations (Kentucky);

(h) Federal Deposit Insurance
Corporation;

(i) Federal Farm Credit Corporation;

(j) Federal Home Loan Bank (Stocks and
Bonds);

(k) Federal Housing Administration;

(l) Federal Intermediate Credit Banks;

(m) Federal Land Banks;

(n) Federal Maritime Board and Maritime
Administration;

(o) Federal Reserve Banks;

(p) Federal Savings and Loan Insurance
Corporation;

(q) General Insurance Fund;

(r) Guam Bonds;

(s) Municipal Obligations (Kentucky);

(t) National Farm Loan Association;

(u) Panama Canal Bonds;

(v) Production (Agricultural) Credit Association
or Corporation;

(w) Puerto Rican Bonds;

(x) Student Loan Marketing Association;

(y) Tennessee Valley Authority;

(z) U.S. Housing Authority;

(aa) U.S. Postal Service Bonds; or

(bb) Virgin Island Bonds.

(2) The following list is provided as a
general reference of obligations that are taxable entities for state ad valorem
taxation imposed by KRS 136.290, 136.300, 136.310, or 136.320: